RBA should have lifted rates amid the fog of war

ABS data shows the economy grew by 4.2 per cent over 2021, and by 4 per cent over the year. Above, Degraves St in Melbourne’s CBD. Picture: NCA NewsWire / David Geraghty

Both short and long-term economic policy were brought into sharp focus over the course of less than 24 hours during the week – even if that focus was blurred somewhat by the fog of war.

At 2.30pm on Tuesday, the Reserve Bank left its official interest rate unchanged at the all-but-zero it has been since Melbourne Cup Day, back not only in 2020 but, more relevantly, close to the heart of darkness of the Covid-19 pandemic.

To say that this was the most predictable decision ever from the RBA would be to understate it. The RBA was already certain not to hike before Russia invaded, that certainty was then written in concrete after the invasion.

What the RBA should have done is a very different matter. The more I think about it, the more I conclude that it should have moved its policy rate up from 0.1 to 0.25 per cent.

It should have – publicly – intended to do that before the Russian invasion, and it should have stuck with such an intention after the invasion.

Then, at 11.30am Wednesday, the Australian Bureau of Statistics released data showing that the economy grew by 4.2 per cent over 2021.

Even more strikingly, GDP per capita grew by almost as much: 4 per cent over the year.

This was easily the highest per capita annual growth rate this century – the two decades in which, not exactly coincidently, we’ve enthusiastically embraced, or maybe just let roll over us, the high-immigration Big Australia paradigm. Again, both numbers should have almost as surprising as the RBA decision. That is to say, not. GDP was always going to surge in the December quarter, as Victoria and NSW freed their 14 million citizens from house arrest.

I wrote last year that I expected GDP growth in the quarter to top 4 per cent; I was overoptimistic as it came in at 3.4 per cent – or, a stunning 13.6 per cent annualised, as the Americans like to report it.

A combination of basic logic and simple arithmetic would have told you that with the borders closed, and the only population growth what used to be called natural, almost all the overall GDP growth for the year, the 4.2 per cent, would flow into the per capita growth number, the 4 per cent.

Yes, you could argue that it was all down to stimulus spending. But while that might have delivered the overall GDP growth number, what (mostly) delivered the per capita growth number was the absence of 500,000 migrants (over the two years).

This should prompt – this must prompt – a return to a Bigger or Better Australia debate and policy analysis.

And no, I am most certainly not suggesting that the numbers argue for keeping the national border closed permanently or that net, far less gross, immigration should be cut permanently to zero.

The rational argument is not over zero or 250,000 but 250,000 or some lesser number – 50,000? 100,000? – and even more critically the skills component and how that component should be skilfully managed to optimise the macro and micro (enterprise) outcomes.

One thing is now blindingly clear: the high immigration dynamic – merged with much of the GDP growth coming in infrastructure, especially roads, and residential construction, especially in Melbourne and Sydney, and selling more people more “stuff” – and the way all that “integrates” into residential property inflation – has certainly failed at the quality/micro and even at the macro/quantity level.

Aggregate growth – the “quantity” – this century has been pathetic, struggling to reach even 3 per cent each year. Per capita growth – the ”quality” – has been equally pathetic, struggling to reach even 1 per cent each year.

And just on that overall Big Australia point: does anyone with an IQ above 50 seriously believe that an Australia with a population of 50 million is somehow going to be more effective in standing up to China – both militarily and economically – than a population of 30 million? The low per capita growth and even the low overall growth have been blamed on poor productivity. Exactly; that is all true but meaningless.

By all of it I mean, that is exactly what you get when you try to buy economic growth by pump-priming population growth, even if you think you are focusing on skilled immigrants.

It is quite simply all-too easy to just build more properties in Melbourne and Sydney and sell more people more (imported) “stuff” – paid for, incidentally, by shipping off more iron ore to China.

This feeds back into the short-term policy issue and why I believe the RBA should have started hiking on Tuesday, and by the 15 points to get back to the 25-point marker.

It would of course have required RBA governor Philip Lowe to have long ago moved away from his “not before ‘24’” rhetoric – he’s only just edged it, with his “plausible” concession, into (the back-end of) 2022.

I could spend a column arguing how inflation had already got up and away – with headline running at over 4 per cent annualised in the December half, and even underlying going above 3 per cent – with the events out of Ukraine already accelerating it.

This is already flowing into higher wages. The near 3 per cent annualised jump in the Wage Price Index in the September quarter – when Victoria and NSW were in lockdown – was very, very (good for workers, ominous for wages-prices) telling.

The national accounts suggest a significant acceleration in the December quarter. And again, this ties back to the long-term issue – capping or fearing a wages acceleration all depends on turning on the migrant inflow, like we’ve done with Warragamba and Wivenhoe.

But there’s something much more basic. The 0.1 per cent was an ‘‘emergency’’ rate delivered at the peak of the emergency. It is quite simply no longer relevant, and is structurally destructive.

You might just as well argue we should have kept JobKeeper going.

Or the lockdowns.